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Europe has cheap, widespread access to cellphone and Internet service. But it's quickly falling behind the U.S. in rolling out the latest, zippiest technologies, like 4G wireless and fiber-optic hook-ups for homes.

Over the past 15 years, Europe's telecom regulators have focused on spurring competition and driving retail prices lower. Mostly, that has meant forcing the Continent's big phone companies to rent their networks cheaply to newcomers. Prices have indeed fallen and there's no shortage of competition: Western Europe has hundreds of fixed-line service companies sharing a handful of networks, and more than 50 mobile operators at the end of last year, versus four in the U.S. covering a similar-size territory and population. But the flow of profits is uneven. Europe's network renters earn average returns of more than 20% on the capital they invest, precisely because they invest so little. Network owners, which still account for three-quarters of capital spending, earn average returns in single digits, which makes them reluctant to spend more. Meanwhile, demand for data is exploding, and wireline phone companies hold the key to both laying next-generation cables for broadband and using those cables to relieve congested wireless networks.

Something has to give. Europe's lack of telecom investment is sapping jobs, economic growth, and competitiveness, according to a report last December by McKinsey. It called for a "new deal" between industry and regulators that spurs investment rather than competition, in part by allowing network owners to collect higher rents. Conditions are now aligned for sweeping changes, says Robin Bienenstock, a telecom analyst at Bernstein. Neelie Kroes, Europe's digital commissioner, wants to set up a single telecom market for the Continent. She has moved the announcement of her plan forward to June from fall—a sign she wants to take action before parliamentary elections next year. The plan is likely to allow for cheaper and easier data roaming from one country to the next, which could pave the way for industry consolidation. It will also likely seek to revive broadband investments through friendlier regulations. In short, Europe's telecom industry is poised to become more like America's, where the two main network owners,
Verizon CommunicationsVZ 0.7040876197926853%Verizon Communications Inc.U.S.: NYSEUSD51.49
0.360.7040876197926853%
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14.968023255813954Market Cap
208438302471.991
Dividend Yield
4.486308020974946% Rev. per Employee
719719More quote details and news »VZinYour ValueYour ChangeShort position
(VZ) and
AT&TT -0.07423904974016332%AT&T Inc.U.S.: NYSEUSD40.38
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(T), are currently stock-market darlings.

U.K. investors have gotten a preview of this shift.
British Telecom
(BT) has spent around $4 billion over the past four years to lay new fiber-optic cables, which it must share with rivals, but with profitable pricing. Average U.K. broadband speeds have tripled during the build-out period. BT, which had lost revenue and market share for years to smaller companies offering bundled services, recently reported flat quarterly revenue and the addition of 211,000 fiber customers, bringing its base to 1.3 million. The stock is up more than 50% in a year.

A FAVORABLE CHANGE in fiber regulations across Europe could add 75% to the market value of Telecom Italia, 40% to France Telecom, 25% to Deutsche Telekom, and 17% to Telefonica, reckons Bienenstock. Cautious investors should go for the smaller gains, however. Telecom Italia is loaded with debt and faces a rapidly declining business in Italy and a Brazilian business in which it can't afford to properly invest. France Telecom is "first a vehicle of employment, infrastructure delivery, tax revenue and overseas political influence for the government," and, only second, an investment for shareholders, says Bienenstock.

Deutsche Telekom, on the other hand, recently won concessions from German regulators that will allow it to charge more for some of its digital lines after making inexpensive upgrades. The move suggests a supportive regulatory environment that should help the company thrive with or without Europe-wide reforms. It's also getting more attention from U.S. investors. Deutsche Telekom owns 74% of
T-Mobile USTMUS -3.0913748932536294%T-Mobile US Inc.U.S.: NasdaqUSD56.74
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36.140127388535035Market Cap
48246078478.9925
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N/ARev. per Employee
706280More quote details and news »TMUSinYour ValueYour ChangeShort position
(TMUS), which began trading in the U.S. on May 1 following a reverse merger between T-Mobile and MetroPCS. Shares of the new company have surged more than 20%. Deutsche Telekom sells for 13 times this year's earnings forecast and yields 5.4%.

Telefonica suspended its dividend payments last July and has since sold assets and put the cash toward its considerable debt, while refinancing to reduce costs. It has also rolled out new fiber-optic lines in Spain. Telfonica will reintroduce payments in November at a rate of 0.75 euro (96 U.S. cents) a share per year, a 6.7% yield calculated against the recent stock price. The company has long reported steep declines in Spain offset by strong growth in Latin America, which now brings in most of its profit, and where Telefonica is now better positioned than its rivals there to invest. In Spain, Telefonica is finding success with quad-play offers, which combine wired and wireless phone with television and Internet at discounts to stand-alone prices. The popularity of the plans has helped Telefonica wean customers off of handset subsidies. Shares sell for 10 times earnings.

Dialing for Euros

All four of these firms could get a short-term lift as Europe's regulators allow them to charge more for their assets. But long-term investors should stick with Deutsche Telekom and Telefonica.